The milk bull has jumped the fence
In last month's production report, USDA stated February milk production was up 6%.
The trade took this in stride suggesting the amount of increase was expected and the strength of demand to not warrant a decline in price. In addition, the free marketplace has stated that the future price of milk should be higher. And this likely from realization of higher cost of production, summer weather risk and that the demand side is willing to insure future production.
My forecast for this year has offered a higher price into late 2008 with potential to extend the trend into 2009. The model forecast continues to call for a record high price some time now into 2009. I still expect less of a US economic negative impact to dairy than other commodities. In fact the so called recession is more of the financial and service sectors than the commodity sector.
Intermediate trend models suggest price strength into May.
Relative value of milk. A clue that the models can be a leading indicator?
The old dollar
For decades analysts have referred to individual commodities in terms of gold. Gold is assumed to be the old currency. I recently ran a study of spot milk futures price relative gold as a ratio. The trend for this decade has been down. The trend since the 2007 top is still down but offering technical sign of stability. A down trend for this study suggests milk has been selling at cheaper and cheaper price relative gold.
The new dollar?
Using spot crude oil futures as a substitute for gold I find similar trends that milk has been of cheap price relative crude oil.
With alteration of gold and crude oil for a â€œwhat ifâ€ future price possibility I find that with gold at $850 to $1100 and oil at $85 to $120 that milk should be $22 to $30 C3 for what I believe to be a normal relationship. And current spot price ratio suggests $25 to $30 dollars the norm. I view this research as supporting evidence for the separate milk model bullish forecast.
I expect corn and soymeal long term trends are up into July and are allowed to extend beyond the summer months. I think there is potential for $6.80 to $11.00 dependent upon weather and amount planted. Soymeal is to be a follower but I would not rule out $425 or higher.
The intermediate trend forecast for both corn and beans is bullish into next month.
Crude oil traded higher than expected during February to March which caused models to turn to bullish and to forecast a rally into May. The forecast calls for a new record high price at that time. The May top should be the second opportunity to place a long term business cycle top but to not place the decadal top. I still view oil as over valued and expect consumer relief late 2008 and perhaps into early 2009. And I still expect still higher price mid 2009 into or through 2010. I remain more bullish natural gas than the crude oil sector.
My long term models are bearish stocks per the Dow and Russell 2000 indexes. The Russell may be able to place a long term bottom as soon as next month while the Dow should wait until September into yearend or even first 2009. The models are bullish per long business cycle trends for 2009. The intermediate trend models are currently bullish stocks but also suggest first chance for a top near month end.